Fed Now ‘Completely Data-Dependent In Both Directions’ – BofA

By Michael Aneiro

The Federal Reserve’s wording change to its policy committee statement this week shows that the Fed is now “completely data-dependent in both directions,” according to Bank of America Merrill Lynch credit strategist Hans Mikkelsen, as the Fed has now explicitly pledged to either increase or reduce the pace of QE depending on the status of its dual mandate.

Prior to today’s surprisingly upbeat April jobs report, the recent slowdown in the economy meant that “the probability the Fed will turn up the QE volume has increased,” according to Mikkelsen, and by explicitly opening up the possibility of increased QE purchases the Fed is implicitly acknowledging the recent weakness in data. But by not explicitly acknowledging that data weakness, Mikkelsen says the Fed also appears to see it as most likely a temporary blip, and thus the Fed will continue to contemplate turning down the volume of QE. More from Mikkelsen:

Thus interest rates are data dependent – if you take a more optimistic view on the economy than consensus you should prepare for higher interest rates sooner rather than later. We continue to find it prudent to be in that camp as fixed income investors, given the tailwinds from the housing market and limited scope for further declines in yields. Hence our strategic (longer term) overweight on credit even though we are tactically (short term) short while the markets adjust to the slowdown in data.